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Cyber-Based Trademark Infringement

Intellectual Property Magazine
July 2012

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Authored by York M. Faulkner, Lynn Wang, and Zou Weining

Although about 10 years behind the US e-commerce boom, Chinese e-commerce platforms ("platforms") are experiencing rapid growth and broad market acceptance. The platforms' success has left brand owners struggling to find realistic and practical ways to minimize, if not stop, online counterfeiting. In the current environment, brand owners face a sobering array of fake "iPhones," "Nike" shoes, "Swarovski" crystal, and thousands of other imitation items sold at cheap prices on the e-commerce platforms.

Table 1 reports a confidential survey of counterfeit items of five well-known product lines sold on Chinese platforms from Feb 2011 to Nov 2011. These trends are typical of the products and brands that the authors monitor.

The main weapon that brand owners can use to combat online counterfeiting is "report and delist"—notifying the platforms of infringing offers on their sites and requesting the platforms' voluntary delisting of the products. Most Chinese platforms honor "report and delist" requests. In particular, English language based platforms, "alibaba" and "made in China" tend to show more willingness to cooperate. Still, brand owners face a growing number of counterfeiters who rapidly regroup and come back online after a delisting. The current practices place the burden of policing the platforms' sales almost entirely upon brand owners. A question garnering serious consideration is whether the platforms themselves should share the burden by proactively monitoring their sites.

The prevailing judicial opinions in China currently limit the platforms' duties to timely honoring "notice and delist" requests—imposing liability on the platforms only when it is shown that they had knowledge of specific infringing acts. Platforms thus have little incentive to monitor the tremendous volume of transactions on their sites for infringement—facilitating the rapidincreases in online counterfeit sales. Chinese courts are only recently becoming acquainted with e-commerce infringement, and China stands at a crossroads. Under discussion is whether China will follow the permissive U.S. precedents beginning with the eBay v. Tiffany case or implement the stricter requirements that appear to be developing in Europe.

Platform Trademark Infringement Litigation in China

The best-known Chinese platform, "Taobao," went online in 2003. By 2010, Taobao's registered users had swelled to nearly 400 million and were trading 800 million goods online. An average of 48,000 items are sold on the site every minute, and gross sales from a single-day of trading average RMB1.95 billion.1 Despite Taobao's relatively long history and extensive online sales, there are only twenty (20) reported Chinese cases in which Taobao was sued for trademark infringement. Those twenty cases were separately brought by only four companies—Pro-Health (China) Co., Ltd.; Rolor Cosmetic (Chengdu) Co., Ltd.; Puma SE; and E-Land.

In all but one of these cases, the Chinese courts held that Taobao was a mere cyber-based service provider that sufficiently complied with the "notice and delist" duty. Taobao suffered its first and only loss in May 2011 when the First Intermediate Court of Shanghai held Taobao jointly liable for trademark infringement for failing to honor repeated delisting requests. The damages, however, were limited to only RMB10,000.2

Legislative and Judicial Origins of the Current Enforcement Environment

Obviously, brand enforcement in China has its own domestic roots—growing up from statutory enactments and judicial decisions. The "notice and delist" rule, for example, is codified in Paragraph 3, Article 36 of the Tort Liability Law, which provides that cyber-based service providers shall be jointly and severally liable only when they know or should know of the tortious acts. That article also adopts the "notice and delist" mechanism under the "Regulations on Protection of Right to Disclose Information through the Internet" for torts other than copyright infringement. It waives a cyber-based service provider's liability to pay damages if it timely delists the infringing products. In practice, courts are guided by the following concepts:

1. Platforms are cyber-based service providers In one published decision, the Intermediate Court of Guangzhou explained that platforms are technical service providers who merely publish their customers' information through electronic bulletin services. Consequently, platforms are not, themselves, sellers but instead services providers to those who actually sell items on their sites.

2. Platforms lack the capacity to police their sites Recognizing that the dimensions of cyber-space are virtually unlimited, the Intermediate Court of Guangzhou concluded that requiring platforms to be strictly liable for the legitimacy of all trade on their sites is "beyond the scope of their capacity."3 Despite their size and profitability, platforms thus enjoy judicial sympathy for the burdensome task of policing millions of online transactions.

3. Once notified of infringement, platforms must timely actIn the recent Taobao case, the court found that Taobao failed to adopt reasonable and effective delisting measures and that its "laissez-faire" response to the identified infringement resulted in unnecessary additional injury to the brand owner. Accordingly, platforms are expected to act both reasonably and timely after receiving infringement notifications.

The views expressed by Chinese courts about platform liability for counterfeit sales are remarkably similar to the rationale underlying the recent e-Bay v. Tiffany case in the United States.

The Tiffany v. eBay Case in the United States

The liability of e-commerce platforms for trademark infringement in the United States was most recently and comprehensively addressed in the leading case of Tiffany Inc. v. eBay Inc., 600 F.3d 93 (2nd Cir. 2010). In that case, the court stopped well short of imposing strict liability on e-commerce platforms for the sale of counterfeit goods on their websites. The court declined to hold eBay liable for trademark infringement even though a "significant portion" of the "Tiffany" jewelry offered for sale on eBay was counterfeit and eBay knew generally that "some portion" of the offered goods was counterfeit. Id. at 97-98.

The court quickly dismissed Tiffany's allegations of direct trademark infringement, ruling that eBay's inability to guarantee the genuineness of goods on its website was insufficient reason to impose liability for direct trademark infringement. Id. at 103. The court focused instead on Tiffany's allegations of contributory trademark infringement, extending the analysis in Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844 (1982) that a manufacturer or distributor is liable for contributory infringement where it (1) "intentionally induces another to infringe a trademark" or (2) "continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement." Id. at 854. Tiffany conceded that eBay did not intentionally induce the trademark infringement but asserted that eBay continued to supply its services despite knowing or having reason to know that sellers were offering counterfeit goods.

The court disagreed, finding that where eBay had actual knowledge of counterfeit sales, it promptly removed the offending listings. The court likewise rejected Tiffany's assertion that eBay acted with willful blindness. The court ruled that Inwood's "reason to know" test must be applied to specific offending listings and proof of "[s]ome contemporary knowledge of which particular listings are infringing or will infringe." Id.

The court expressed little sympathy for the burden that its ruling would place on Tiffany to continuously monitor eBay's website for actual counterfeit listings. The court reasoned that Tiffany was better positioned to identify counterfeit listings and explained that broadening the scope of eBay's liability as Tiffany urged would unfairly benefit Tiffany by diminishing competition from legitimate second-hand sales of Tiffany products on eBay. Id.

More recently, the European Court of Justice clarified the so-called safe harbor provision of the EU's E-Commerce Directive, favoring brand owners. In a ruling dated July 12, 2011 in a case originating in the UK between L'Oreal and eBay, the court explained that the hosting provider's safe harbor extends only to neutral or passive, automated third-party data processing. The court ruled that an online market such as eBay is not neutral or passive but instead optimizes and promotes offers for sale. The ruling stopped short of an outright liability determination, which must be made by the referring UK court. Nevertheless, the narrowing of the safe harbor provision is an apparent victory for brand companies and promises to extend the power of European courts to intervene in online markets and require e-commerce platforms to adopt stricter control over their online listings.

European and Chinese approaches to intellectual property generally and historically share many points in common. China's current intellectual property laws were enacted in 1984. The Chinese IP system was based in substantial part on the EU model. In "first to file" systems such as the EU and China, the trademark registration itself gives more certainty to the establishment and scope of the property. The U.S., in contrast, adheres to a "first to use" rule for establishing trademark ownership, fostering an environment in which right owners must expend considerable effort to demonstrate ownership through active use and enforcement. Hence, "first to file" countries have tended to favor brand owners by simplifying the requirements for establishing and enforcing brands and trademarks. For these reasons, it is quite possible that Europe will continue to lead and China will follow in requiring platforms to share the burden of policing online infringement.

Indeed, there is Chinese precedent for imposing private policing duties on owners of traditional "brick and mortar" markets. In a well-known case, Louis Vuitton sued the Beijing Xiushui Clothing Market (Silk Market), which is a type of shopping mall. The Beijing Higher People's Court held that "the Beijing Xiushui Clothing Market enjoys many commercial benefits, such as the right to manage the market, determine business hours, and choose the type of businesses that trade in the market. At the same time, the Court ruled that the Xiushui Clothing Market bears certain legal obligations such as maintaining market order and preventing illegal activities, including trademark infringement.

Nevertheless, brand owners can ill afford to wait for changes to intellectual property laws and should, in the meantime, adopt pragmatic strategies to combat online infringement:

Set up routine "request and delist" servicesUtilizing watch routines and regularly reporting counterfeiters to platforms on a weekly or monthly basis better deters infringement by showing counterfeiters that they are closely watched. One-time or erratic enforcement efforts rarely yield the results that brand owners want. Key word searching (by brand name), price filters, picture reviews, and seller orientation are examples of effective monitoring strategies. Another important consideration is whether suspect products are offered as new or second hand items.

Combine online monitoring with field investigationField investigations together with personal legal action against egregious online infringers establish needed deterrence of would-be infringers as well as motivation for the platforms to educate their customers about legitimate uses of their sites.

Encourage platforms to monitor and facilitating legislationSome e-commerce platforms have started to set up automatic filters based on price, which presume product legitimacy of offerings above a certain price threshold. This type of filtering often is conducted without brand owner input with limited effectiveness. The filtering would be improved by a safe-harbor rule permitting brand owners to communicate directly with platforms without fear of violating price-fixing laws.

Conclusion

The Chinese courts' development of the cyber-based trade platforms is, historically speaking, relatively short. The legal rules governing the online platforms have not fully matured, and the imbalance of interests among the trademark holders, the cyber-based vendors, the platform operators, and the consumers remains an impediment to change. On the one hand, the platforms are still making profits and growing. On the other hand, profiting from widespread trademark infringement on their sites is not a sustainable growth model. Laudably, platforms have been seeking the cooperation of brand owners and exercising more effective administration over the unlawful acts on their websites. But there is still no real engine to drive reform under the current environment of lenient legal enforcement. Thus, while encouraged by certain positive trends, brand owners must continue combating infringement through civil litigation, cooperation with government agencies, and earnest negotiations with the platforms themselves. The eventual goal is a win-win scenario for brand owners and platforms alike with an enlarged e-commerce channel for the online sale of genuine goods.

Originally printed in Intellectual Property Magazine (www.intellectualpropertymagazine.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.